Nonqualified Deferred Comp for S-Corp?

[cs771]

An S Corp with 4 owners. 2 owners are looking to be bought out in the next 3-5 years. Additional options outside qualified retirement plans are being considered. Is there a nonqualified deferred compensation plan that would work in this scenario - possibly having remaining 2 owners pay the deferred compensation out of future earnings or fund it through life insurance? If so, can you please provide a general explanation of how this would work?

Thank you!

[Mark Whitelaw]

As you know, traditional NQ benefits utilize a promise to pay / deferral of compensation typically informally funded with investment oriented institutionally priced life insurance (ILI), also known as COLI, BOLI, etc., to informally fund benefits and provide the company keyperson risk management and cost-recovery. That funding model doesn’t work well today – especially for S-corp or owners of any pass-through entity.

As an alternative to the traditional model emerged in 2002. By executives were living so long, reducing institutional life insurance total costs so low (discounted fund fees plus ILI policy/risk costs) that the ILI policy became more valuable as a personal cash management or benefit delivery asset than the NQ plan. Today the ILI fund discounts are greater than the cost of insurance. The result is a more effective alternative investment than investing in those same / complementary funds in their retail pricing in a Roth. “(A+B) < C”

Today it’s more efficient / effective to fund NQ objectives (incentive compensation and / or deferral convenience) on a two-policy approach – one ILI policy owned by the executive for company contributions via deductible bonuses / personal contributions as an after-tax tax-advantaged Roth alternative, and one ILI policy owned by the company for keyperson risk management and cost-recovery of after-tax bonuses to the executive. And if the company wants to put a vesting schedule on their bonus contributions – they can on a fully discretionary basis per participant and plan component (incentive and / or deferral match).

This is a more efficient funding / management structure to address traditional NQ objectives with none of the hassles, costs or unsecured creditor risks of 409A. We’ve been designing / funding / administering this alternative through The STAR Plan, a third-party sponsored ILI Total Cash Management alternative for employers and / or key employees, since 2002.

Feel free to contact me directly with any questions.